2008 Forest Tax Update Establishing Timber Basis

Dr. Linda Wang National Forest Tax Specialist USDA Forest Service

A Tax Expert? Who is the figure behind every great man, the individual who knows his ultimate secrets? A father confessor? Hell no, the tax expert. Louis Auchincloss

Tax Assistance An important service to forests Tax is consistently listed as one of the top concerns for private forest landowners Tax is a major cost of owning and managing private forests

Tax Resources for Forest by US Forest Service Provide timber tax workshops Publications –Annual Timber Tax Tips –Forest Landowners’ Guide to the Federal Income Tax –Estate Planning for Forest Owners

Tax Resources National Timber Tax Website: –Extensive: Income, estate and property law –Professional referencing Service and Publications by Extension, State Agency and University

Tax Resources Magazines –“Tree Farmer” –“National Woodland Owners”

Timber Basis Why is it important? Basis reduces timber sale proceeds Only the net amount is taxable (Tax Code §1001(a))

Timber Loss Timber loss from hurricane, fire, theft, etc. are deductible to the smaller of FMV loss or timber basis. (Treasury Regulation § (b)(1))

Forest Planting Cost Planting costs (timber basis) may be expensed and amortized (Tax Code §194)

Properly Documenting Basis Before you start, weigh the cost of documenting basis versus the benefit of tax saving –Inherited property –Gifted property –Purchased property

Timber Basis If you inherited the property For inherited property, the initial timber basis is the Fair Market Value of timber on the date of death (Tax Code §1014(a)(1))

FMV of Property When the property is timber The FMV of timber means: –Timber quantity –Timber price on the date of death

An Example Joe inherited a timber tract in Louisiana 20 years ago. What is his timber basis?

Answer to the Example Timber quantity and price 20 years ago in Joe’s land: –Pine sawtimber 100 tons x $20/ton = $2,000 –Pine pulpwood 200 tons x $5/ton = $1,000 –Hardwood pulpwood 300 tons x $1/ton = $300 $3,300

Land with Pre-Merchantable Timber The FMV of timber generally means $/acre

Special Tips for Timber Basis Timber basis has two parts: timber quantity and $ value (Tax Regulation § )

Special Tips for Timber Basis Basis must be allocated between land and timber (Tax Regulation § )

Timber Basis For purchased property, timber basis is the purchase price plus acquisition costs

Timber Basis For gifted property, if no gift tax is paid, the basis is: (a) donor’s adjusted basis (gain at disposal) (b) the lower of the donor’s adjusted basis or the FMV (loss at disposal) (§1015 and §1.1015)

Timber Basis For gifted property, if gift tax is paid, the basis is the donor’s adjusted basis plus all or a portion of the gift tax paid

Timber Basis Timber basis generally carry over to the new property when acquired through: –non-taxable (or partially taxable) transaction –re-investment in connection to involuntary conversion

Learn More Chapter 5, “Forest Landowner’s Guide to the Federal Income Tax” National Timber Tax Website